Fitch Assigns WHAs New Debentures #BBB+(tha) Rating

Fitch Ratings (Thailand) Limited has assigned a 'BBB+(tha)' National Long-Term Rating to WHA Corporation Public Company Limited's (WHA, BBB+(tha)/Negative) new senior unsecured debentures of up to THB3 billion due in 2020.

The debentures are rated at the same level as WHA's National Long-Term Rating, as they represent the company's direct, unconditional, unsecured and unsubordinated obligations. The proceeds of the debentures will be used to repay the maturing bonds and fund working capital and capex requirements.

KEY RATING DRIVERS

Rising Project Development Cost: The Negative Outlook reflects the remaining challenge for WHA Corporation Public Company Limited (WHA) to deleverage as planned, given its increases in project-development cost as well as overseas investment to about THB7.5 billion per year in 2017-2019. Fitch expects FFO-adjusted leverage to rise in 2017, despite lower debt, before decreasing to the range of 5.3x-5.5x over the medium term.

Successful Asset-Disposal Plan: WHA carried out its asset-disposal plan and a debt reduction of THB6 billion in 2016, leading to a decrease in FFO-adjusted leverage to 5.4x by end-2016. The recent 30% spin-off of its utility business has reduced the debt by a further THB5 billion by April 2017.

More Integrated Business Model: The acquisition of Hemaraj Land and Development Plc. (Hemaraj) has strengthened WHA's market position in the industrial property business, supporting its leadership in the development of both premium built-to-suit warehouses for lease and industrial estates in Thailand. WHA plans to generate more recurring revenue by providing more integrated services for its customers in the industrial estates, eg data centre and managed services, internet services and IT outsourcing services. WHA's revenue has more than doubled while the proportion of recurring revenue to total revenue should rise to 30%-35% from 10% pre-acquisition over the medium term.

Larger Exposure to Cyclicality: The expansion into industrial estate development has increased WHA's exposure to volatility of land sales and cyclicality of property demand, as well as stiffer competition. WHA's original business of developing premium built-to-suit warehouses for lease had limited its exposure to property market cycles, because the warehouses are pre-leased and have long-term contracts. The competition in this niche market is also relatively low.

DERIVATION SUMMARY

WHA has higher revenue and EBITDAR, and a more integrated business model than its property-investment peers. However, it also faces high development risk and exposure tovolatility of land sales from its industrial estate business. TICON Freehold and Leasehold Real Estate Investment Trust (TREIT, 'A-(tha)'/Negative), an industrial property REIT, is comparable with WHA's ready-built factories and warehouses for rent business. However, TREIT has no development exposure, with significantly lower financial leverage and higher financial coverage than WHA. This warrants TREIT's higher rating. JWD InfoLogistics Plc. (JWD, 'BBB+(tha)'/Stable), a full-service in-land logistics provider, is not a property-investment company, but has similar characteristics. Unlike the pure property rental business, JWD's revenue is still exposed to the volume and activities of customers, although its earnings are somewhat supported by long-term contracts. WHA and JWD are rated at the same level, with JWD's lower financial leverage and higher financial coverage. The business profile of Siam Future Development Public Company Limited's (SF, 'BBB(tha)'/Stable), as a community mall developer, is similar to the rental business of WHA but in a different industry segment, i.e. retail versus industrial. With a similar range of financial leverage, WHA is rated higher than SF.

Marginal growth in rental and service income in 2017, given large sales of investment properties in 2016, and 15%-20% growth per year in 2018 and 2019 from the growing water business and new digital infrastructure business;

An increase in land transfer to 1,300-1,350 rai a year in 2017-2019;

Sales of investment properties of THB3.5 billion-4.5 billion (excluding sales by JVs) per year in 2017-2019;

EBITDAR margin to narrow to 38%-40% in 2017-2019 due to lower high-margin sales of Hemaraj's investment properties;

Capex spending - including project development cost and investment in power affiliates - of about THB7.5 billion per year in 2017-2019.

RATING SENSITIVITIES

Future Developments That May, Individually or Collectively, Lead to Positive Rating Action

The consolidated FFO-adjusted leverage at below 5.5x on a sustained basis.

Future Developments That May, Individually or Collectively, Lead to Negative Rating Action

An aggressive investment, high dividend payment or weaker-than-expected revenue and EBITDA margin resulting in a consolidated FFO-adjusted leverage unlikely to decrease to below 5.5x from 2018 onwards.

LIQUIDITY

Manageable Liquidity: Out of THB12 billion debt to be due in 2017, THB5 billion has already been repaid by the proceeds from the 30% spin-off of the group's utilities business carried out in April 2017. The remainder should be mainly supported by cash balance and short-term investment of THB4.7 billion as well as undrawn committed facilities of THB2.1 billion at end-2016. The company also has the ability to access the capital markets.